Tax reform is on the minds of elected officials in Washington and in many state capitals. If and when reform is passed, the likelihood that big business will benefit is high. Unfortunately, although small business represents 99.7 percent of all American firms, as defined by the U.S. Small Business Administration (SBA), it’s unlikely they will benefit at all.

According to the SBA, small business has created 64 percent of net new jobs, 46 percent of gross domestic product, 50 percent of private sector employment, and 33 percent of U.S. exporting value. Not a bad effort for average Americans who follow their dreams and take responsibility for their lives.

Small business owners, who typically are under capitalized and overworked, support American community life and don’t move their businesses out of the country. Consequently, one would expect our elected officials to vigorously support legislation that both encourages and reinforces the development of small business. Unfortunately, this it not the case.

The most basic tax small business incurs is property tax, an important revenue source for any U.S. community. Principally, property taxes pay for schools, waste management, roads and public safety — services important for any small enterprise. On the other hand, big businesses often work hard to avoid property taxes by receiving preferential arrangements like Tax Increment Financing (TIFs).

TIFs are tax avoidance plots that could relieve big firms of as much as 80 percent of local property taxes for up to 30 years. This tax loss is transferred to all other taxpayers, including small business owners.

An important first reform to benefit small business and local communities is the repeal of property tax avoidance schemes. In turn, big business would begin to pay its fair share of local services and thereby reduce the burden currently placed on small business owners and other taxpayers.

Small business owners generally do not have the tax avoidance resources that big business enjoys.

A second recommended tax reform is the elimination of long-term capital gains on small business gains less than $5 million. In addition to being sound economic policy, this would particularly help the larger-scale small businesses.

Surprising to many, 52 percent of small business is home-based. The most important long-term capital gain for many home-based business owners is the gain in value of their house — and it is likely already exempt from long-term capital gains taxes. The largest firms in the small business category are making other types of capital investments. These companies invest in capital assets that increase revenues, productivity and shareholder value. Free of long-term capital gains taxes, small business owners would stay focused on growing the value of their businesses and delivering the subsequent benefits to their investors, employees and communities. Unlike Fortune 500 companies, they are not living under the ill-considered demands of presenting what are unrealistic profits for the next quarterly report.

The final suggested tax reform involves corporate tax rates for big businesses that are effectively stuck at an average rate of 13 percent. The effective corporate rate for bigger firms should be approximately 20 percent. A strategy to achieve this would involve repealing the most egregious loopholes designed for those with legislative influence.

The average s-corporation, which typically is a small business, currently pays a corporate tax rate of 26.9 percent — twice as high as big business. Why? The small business s-corporation owners generally do not have the tax avoidance resources that big business enjoys.

To remedy this inequity, a strategy could involve taking a portion of the increased revenue from an effective rate of 20 percent and provide a tax credit against the income taxes for small business owners who create jobs, particularly in the export sector. This not only would reduce the effective tax rate of small business owners, but also help lower the trade deficit.

Another more daring idea might be to eliminate the corporate income tax entirely, loopholes and all, and enact a consumption tax (including services) with a rule similar to the earned income tax credit for the lower income businesses, limited liability companies, sub-chapter s corporations. and sole-proprietorships.

These reforms, if enacted, could spur greater economic growth and job creation. And entrepreneurship and small businesses, a real strength behind America, would be leading the way. However, to achieve these goals, small business must be on a level playing field with America’s business giants. Tax reform for small business is a good place to start.

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James Wilfong
About The Author James Wilfong
James Wilfong is Chairman of Innovative Applied Science. He also is an international business practitioner, educator, Veterans business advocate, public servant, and a member of VET-Force and the President’s Task-force on Veteran’s Business Development.




Talkback (2)

  • Guest (ed marsh)

    Permalink

    Jim - agree with each of your tax reduction suggestions - but you lose me with any suggestion for increase.

    You speak on the importance of export and global growth - the fact is that we are in a global market and large companies have tax rate arbitrage opportunities. A quick example is that even if R&D workers sit in the US, the IP can be owned by a foreign entity of the company, dramatically reducing their exposure. And increasingly complicated systems trying to close loopholes simply lead people to devise others. The only solution is to eliminate convolutions, simply the system and reduce the rate across the board so that the delta is small enough to no longer motivate expatriation of value. But one can't demonize the executives who labor under clearly articulated fiduciary responsibility and increasingly draconian personal criminal exposure dictated by, of course, oppressive government regulation itself. They must take these steps or face exposure to law suits which are designed to pierce the corporate veil to magnify their impact.

    You don't mention the estate tax which is perhaps the most dastardly, long term, for small businesses. Create a company worth $20MM and face (depending on state) somewhere from 7-10MM in taxes on death. That eviscerates a business - it simply destroys its viability. So one must either pay $1MM each year in life insurance premiums to fund the estate tax or lose control through a sale. This has destroyed family farming (yet the same people who foisted the taxes upon the farms now demonize factory farms....) But small manufacturing businesses face the same exposure. It gives the owner pause, it traumatizes workers who are impacted (not just get a pound of flesh from the folks who can afford it because they are 'rich' according to someone's arbitrary yardstick) and it retards growth (as do numerous other regulations that kick in with punitive implications at various stages of employment or revenue.)

    But speaking of "regulation" - that is the unspoken tax which you didn't mention - and perversely it is one which disproportionally impacts SMBs. With all the fretting about anti-trust on the one hand of government purportedly looking out for the "little guy", the other hand of government, nakedly influenced by large companies which have literally purchased favor with campaign contributions, imposes regulations compliance with which require staffing and scale. Companies are literally able to use the bludgeon of government to legislate their competition into noncompetitive oblivion. That of course destroys small business and raises costs for everyone.

    And increasingly the regulatory legislation isn't even concocted by accountable elected legislators as intended - but rather by appointed bureaucrats (often with appallingly little - often even ZERO - business experience!) It is motivated in most cases by altruistic impulses, but absent any scintilla of awareness of how it impacts throughout the economic ecosystem.

    And as long as politicians pander to an electorate ignorant of the personal income implications of "pass through" entities - painting the person who has a $7MM company, employing 50 people, paying themselves a reasonable salary of $250K/year and keeping $800K in retained earnings in the company account for capital investment and expansion the following year as a slothful, undeserving recipient of $1,050,000 in corporate largess and therefore ripe for Robin Hood confiscation - they will foment a distrust of business and a resentment among those who labor.

  • Guest (David Brochu)

    Permalink

    Thank you again for the ongoing dialogue you've created,

    I am an incurable small business owner. I've yet to find a career path as gratifying as building something from nothing. The jobs we create and the economic activity is a source of great satisfaction to me.

    The jungle we struggle through every day is mostly one of the Governments making. Burdensome and ineffective regulations rank second only to destructive tax policies. When will our politicians and bureaucrats realize that the best way to spur economic activity is to level the playing field and get out of the way.

    I propose a little thought experiment that might help our elected leaders, (or anyone interested enough to wrap their head around it), understand the degree of distortion in our system.

    Taxes are paid to support the infrastructure of the Nation. The idea is that the cost of Government should be born by the Nations citizens that benefit from it appeals to our sense of fairness. With this concept in mind the next logical conclusion is that each citizen should pay taxes to the extent that they benefit from America's infrastructure.

    But how to measure "benefiting"? Lacking any other definition income from all sources would seem like a reasonable proxy. So, here is the experiment:

    Divide you income by the cost of running the Country. Consider as an example $100,000 in household income divided by roughly $3.7 trillion in Government spending (you'll need a calculator with scientific notations) and you'll arrive at .00000003. Now covert that into a percentage and you come up with .00003%.

    In this experiment a household with $100,000 in total income would be benefiting from Government spending to the tune of a tiny fraction of a percent. If one doesn't like total income use total net worth. Or total net worth and income. Regardless of how one does the calculation the average citizen/business owner is responsible for a grossly out-sized amount of the Federal Budget. I uses the the total budget even thought the Treasury borrows $1.2 trillion of the budget as we end up paying it eventually.

    If we are carrying disproportionate amount of the cost of upkeep for the Nation, someone isn't paying their share. Identify that group, level the playing field and watch the economy take off. Unfortunately that would require a new Government.

    We'll, so much for thought experiments.

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